While the state
should consider embracing the switch to a level-dollar payment schedule,
policymakers could also note that in the past, the Legislature has not met the
annual required contribution computed under GASB guidelines.

For instance, in 2007, Michigan legislators voted to
skip the calculations for paying down MPSERS’ defined-benefit plan’s unfunded
liability and simply pay “4.5 percent of the unfunded actuarial accrued
liability.”[*]
This essentially equated to paying the interest on the debt, but not any of the
principal.[58]

Similarly, legislators have twice marked the MPSERS
and MSERS defined-benefit plans’ assets to market values since 1997. This
revaluation had to be done legislatively, and it resulted in increasing the
stated value of MPSERS and MSERS pension fund assets by $4.6 billion and
$1.3 billion, respectively, in fiscal 1997, and by $3.1 billion and
$779 million, respectively, in fiscal 2006. This bumped the total of the
stated asset values of the two defined-benefit plans by 17.8 percent in
fiscal 1997 and 7.8 percent in fiscal 2006.[59] These moves were made specifically to
temporarily lower pension contributions at the expense of future costs and
violated the rationale for the five-year smoothing process, which ensures
smaller year-to-year fluctuations in the state’s annual pension contributions.

Despite manipulating the rules to policymaker’s
advantage, and even aside from intentional underfunding of the pension system,
the state’s funding policies have proved insufficient to ensure payment of the
actuarially determined annual required contributions to MPSERS or MSERS anyway
(see Graphic 3).[†]

Graphic 3 shows
the ARC and the actual payments for both MPSERS and MSERS since 2001. Note that
in most years, the actual payments are less than the ARC. In other words, the
“annual required contributions” are not legally required — or perhaps more to
the point, missing the ARC does not appear to have material consequences,
especially if the “underpayment” is not a gross departure and the normal cost
is paid.

Thus, the state
has ignored GASB’s implied funding policy when convenient; in some cases, the
state has simply failed to pay the ARC. Hence, if the state has departed from
paying the ARC in pursuit of questionable policies, it can consider departing
from paying the ARC in pursuit of better policies.

Specifically, the Legislature could just decide to
adopt the level-dollar payment schedule, but fail to meet the payment schedule,
just as it has in the past. The “transition costs” could be zero if the
Legislature decided to make them so.

There are potential downsides. The state would note
its failure to pay the ARC in its financial statements, and bond raters and
buyers could react negatively to this departure from the implicit norm.

Still, small changes to the unfunded liability payment
method could well be considered somewhat inconsequential by the bond
marketplace if the state is finally pursuing a legitimate defined-contribution
strategy to cap and retire its huge unfunded MPSERS pension liabilities. In
fact, following the Legislature’s 2007 underpayment and a second departure from
standard practice, there was a note in the MPSERS financial statements that
remarked on the changes.[60] If there was
a notable reaction in the bond market, it was too small to have a material
impact on the rest of state policy.

This is not to say there is no value to GASB
standards, and there is every reason for the state to abide by those standards
in its reports, even if it does not make the ARC. As Andrew Biggs of the
American Enterprise Institute has written, “[G]iven governments’ track record
of underfunding their pensions I think these rules (however badly designed they
currently are) have some purpose.”[61]
Nevertheless, GASB is simply suggesting an accounting change. Allowing this to
prevent significant and necessary pension reforms is penny-wise and
pound-foolish.